Circuit Breakers: Back to the Basics
In October 1987, the Dow Jones Industrial Average (DJIA) fell 508 points to 1,738 and the Standard & Poors (S&P) 500 futures dropped 80.75 points to 201.50 in one day. In 1988, a number of studies of the crash recommended implementing temporary trading halts or circuit breakers at the equity related exchanges when the stock market declined significantly. One of these studies, by the Presidential Working Group on Financial Markets (the Working Group), cited the following principles upon which circuit breakers should be based: that artificial trading halts should be infrequent events and that coordination of halts among all equity-related markets is vital. In this Chicago Fed Letter, the author reviews the background of circuit breakers, describes their key principles, examines how the current intervention mechanisms violate these principles and makes suggestions for improvements.